Outside CEOs better for struggling businesses

CEOs hired from outside a company tend to spend more money on R&D, while CEOs hired from within are likely to make large, strategic acquisitions, says a new study.

According to the six-decade study, while 78 percent of new CEOs are selected from within the organisation, internally and externally chosen CEOs execute different financial strategies that could be best suited for companies with different needs.

"If a company currently is either mired in mediocrity or performing poorly and it announces the hiring of an external CEO, it could be a signal that the board is serious about fixing problems," said professor Stephen Ferris from Trulaske College of Business, University of Missouri.

"Although we cannot foretell the outcome of hiring an external CEO, or any new CEO, it could give investors reason to think about investing a little more confidently in that company within the context of their portfolios.

"The hiring of an internal candidate, on the other hand, may indicate that a company is stable and likely to continue an already successful business approach," Ferris explained.

Ferris and colleagues studied succession patterns of the 2,524 CEO turnovers from all firms on the Standard & Poor's 500 Index during the years 1951-2010.

The researchers analysed business decisions of new CEOs and found that external hires spend more money on research and development, which Ferris said is indicative of commitment to innovation.

The study also showed that while internal hires make fewer merger offers than their external counterparts, the acquisitions they do make are much larger in size and more frequently purchased using stock rather than cash.

"If a firm is doing well, the internal process frequently will be sufficient to identify, nurture and promote the people who ultimately will be able to lead the company and continue to generate value," Ferris said.